ORDER
SMT. P. K. AMMINI, J.M. :
This is an appeal by the Revenue against the order of the CIT(A) holding that the commission paid to the bank was revenue expenditure.
2. The assessee carries on the business of purchase and sale of silk fabrics. The assessee claimed a sum of Rs. 88,819 which was paid to Union Bank of India to get the stock seized by the Department released so that it could be sold and profit earned. The claim of the assessee was that the amount has to be allowed as a deduction towards revenue expenditure. It was contended that the expenditure was incurred for the purpose of the business of the assessee. The AO disallowed the claim as he was of the view that the expenditure cannot be treated as business expenditure because the payment was made to obtain stock which was seized by the Department as unaccounted. The assessee appealed.
3. Before the CIT(A), the assessee contended that there was no unaccounted stock as alleged by the AO. The AO did not dispute the payment of commission to bank.
It was further contended that irrespective of the fact whether the stock was accounted for or otherwise, it was a trading asset of the assessee-firm which generated profit. It was also contended that the release of stock on bank guarantee was made by the Department when it was pleaded that the value of the stock would deteriorate if not released forthwith and there would also be considerable business loss. It was also brought to the notice of the CIT(A) that on release of the stock by the Department the same was sold and the resultant profit was offered for the asst. yr. 1992-93. It was, therefore, contended that the bank guarantee commission was incidental to the earning of income from the sale of the stocks released and that, therefore, the commission payment was linked to the trading activity to earn income. Reliance was placed on the decision reported in Modi Spg. & Wvg. Mills. Co. Ltd. vs. CIT (1993) 200 ITR 544 (Del) and Associated Cables (P) Ltd. vs. Dy. CIT (1994) 119 CTR (Trib) (Bom) 66. It was further contended that but for the bank guarantee commission there would have been a total loss of the fabrics due to its perishable nature if continued to be kept by the Department. Therefore, it was contended that any payment to the bank was primarily to safeguard and protect the trading asset. Hence, it was contended that the commission paid to the bank was a revenue expenditure and was intimately connected to the carrying on the business. The CIT(A), accepting the above contentions of the assessee, deleted the addition of Rs. 88,319. Hence, this appeal by the Revenue before us.
4. It is contended by the learned Departmental Representative that the CIT(A) erred in deleting the addition made on account of unaccounted stock relying on the decision reported in (1993) 200 ITR 544 (supra). It is contended that the facts in the reported decision are not relevant to the present case. It is contended that the CIT(A) ought to have appreciated that the bank guarantee commission paid by the assessee to get the seized unaccounted goods released from the Department cannot be called expenditure for the purpose of business or in the course of business. It is the contention of the learned Departmental Representative that the order of the CIT(A) be cancelled and that of the AO restored.
5. The learned counsel for the assessee strongly supported the order of the CIT(A) deleting the addition. It is contended that the bank guarantee was obtained under instructions and compulsions of the Department to secure release of the seized stock-in-trade. It is also contended that the bank guarantee commission was paid not for the purpose of securing any loan facility to purchase an asset. It was for securing the release of the stock-in-trade from the custody of the Department to avoid perishability and to convert it to income. The stock, on securing release, was sold and the income offered and assessed to tax. He referred us to the decision of the Tribunal reported in 119 CTR (Trib) 66 (supra) in the case of Associated Cables Pvt. Ltd. Attention is also drawn to the decision of the jurisdictional High Court in the case of CIT vs. Gogte Minerals (1997) 225 ITR 57 (Kar). The decisions of the Honble Supreme Court in the case of India Cements Ltd. vs. CIT (1966) 60 ITR 52 (SC) and in the case of Madras Industrial Investment Corporation Ltd. vs. CIT (1997) 225 ITR 802 (SC) are also referred to by the learned counsel for the assessee.
6. On a careful consideration of the rival submissions, we hold that the CIT(A) is justified in deleting the addition of Rs. 88,319 on account of unaccounted stock. Admittedly, the bank guarantee has been paid by the assessee to get the seized goods released from the IT Department. The fact that the assessee has paid bank guarantee is not in dispute. It is the contention of the assessee that only because it paid bank guarantee, the goods could be released, sold and some profit could be earned. The profit was offered for taxation. Therefore, it is pleaded that the expenditure could be held to be in connection with the business of the assessee. We have also gone through the case laws cited on behalf of the assessee.
(i) In the case of Gogte Minerals (supra) the jurisdictional High Court has held that the guarantee agreement entered with bank not for acquiring an asset but for securing loan facility to pay amount on deferred payment basis is only financial arrangement and is revenue expenditure.
(ii) in the case of Madras Industrial Investment Corpn. Ltd. (supra), the Honble Supreme Court held :
“reversing the decision of the High Court, that the liability to pay the discounted amount over and above the amount received for the debentures was a liability incurred by the company for the purposes of its business in order to generate funds for its business activities. It was, therefore, expenditure.”
(iii) In the case of India Cements Ltd. (supra), it was a case where the assessee obtained a loan from the Industrial Finance Corporation secured by a charge on its fixed assets and in connection therewith it spent a sum of Rs. 84,633 towards stamp duty, registration fees, lawyers fee, etc., and claimed the above amount as business expenditure. It was held :
“that the amount spent was not in the nature of capital expenditure and was laid out or expended wholly and exclusively for the purpose of the assessees business and was therefore, allowable as a deduction under s. 10(2)(xv) of the Indian IT Act, 1922. The act of borrowing money was incidental to the carrying on of business, the loan obtained was not an asset or an advantage of enduring nature, the expenditure was made for securing the use of money for a certain period, and it was irrelevant to consider the object with which the loan was obtained.”
(iv) In the case of Associated Cables (P) Ltd. (supra), the Third Member concluded that 10 per cent. of purchase price of goods received against bank guarantee which the assessee is at a risk to lose at any time without notice under the contract, has to be excluded from computation of total income.
(v) The learned Departmental Representative has relied on the decision of the Delhi High Court in the case of Modi Spg. & Wvg. Mills Co. Ltd. vs. CIT (supra). But, in our opinion, this decision is distinguishable on facts.
7. In our opinion, the case law relied on behalf of the assessee do support its case. In this case, the assessee has paid bank guarantee only for releasing the goods which were seized by the Department in the course of the search. Therefore, the assessee was forced to pay the amount for releasing the goods and it is the case of the assessee that the goods were sold and earned profits and it was offered for taxation. Therefore, we agree with the contention of the assessee that the amount was paid in connection with its business. Therefore, it has to be treated as revenue expenditure and has to be allowed. In the circumstances, we uphold the order of the CIT(A) deleting the addition.
8. In the result, the appeal by the Revenue is dismissed.